Why is RBC banking on social finance?

RBC chief adamant social finance is investment opportunity

I actually believe that one of the challenges we’re going to have in this area of social-impact investing is that we may end up having way more capital available than we actually do opportunities

This morning, RBC President and CEO Gordon Nixon kicked off a two-day social finance forum at the MaRS Discovery District with a quip that a bank CEO may seem an unlikely candidate to offer opening remarks at such an event. But Mr. Nixon is adamant that Canada’s banking leaders are not part of the same camp as their U.K. and European counterparts, and that they’re in a strategic position to invest in companies that have a mandate to do good in the community. To that end, Mr. Nixon announced a $1-million donation over five years to support the the MaRS Centre for Impact Investing, which was launched last year to increase awareness of social finance and direct new capital and talent to tackle social and environmental problems in Canada. RBC also set up a $20-million fund earlier this year to invest in companies trying to tackle social issues. This morning, Mr. Nixon sat down with the Financial Post’s Dan Ovsey to discuss RBC’s recent focus on social finance; why Canada’s largest bank feels compelled to do away with social ills; and, why he believes such initiatives are as much about ROI as they are about corporate social responsibility. Following is an edited transcript of their conversation.

Q: You seem to feel it’s Corporate Canada’s responsibility and, in particular, the responsibility of financial institutions to address some of our social ills. Is that simply because financial institutions happen to be vehicles of wealth, or because the you feel they have caused some of the calamity?

A: Absolutely not the latter. As you know, in Canada, there hasn’t been much calamity. Notwithstanding my comments about the U.S. and U.K., banks have never been held in higher esteem here in Canada. It’s less a responsibility and more of an opportunity. Although I would couch that by saying that corporate social responsibility is becoming much more relevant and it’s definition is changing as we move forward.

I think this is an area that’s going to grow and ultimately create value and it’s going to create business opportunities; it’s going to create financial opportunities, but it’s also going to create social innovation and social good. We view it as a new, growing area which also provides opportunity, but because of its social finance component, it has to be looked at differently. What we’ve tried to do is ask: how do we provide leadership in terms of providing innovative ways to support these organizations that don’t necessarily fall under the same metrics that a small or medium-sized business would, or even a large corporation would? I would say leadership is driven largely by the responsibility that we feel as a large Canadian financial institution to support these kinds of initiatives, but it’s also an opportunity.

I said at the end of my comments that success in these areas will be defined by companies that actually succeed where you do generate both social and financial returns. If that starts to happen then it’s a win-win.

success in these areas will be defined by companies that actually succeed where you do generate both social and financial returns. If that starts to happen then it’s a win-win.

Q: There are many vehicles through which businesses can obtain investment capital in Canada – angel investors, venture capital, private equity, etc. Why did RBC feel compelled to develop a $20-million fund to help these enterprises build their businesses?

A: We’ve done it from a philanthropic component of our business. I think that is a huge opportunity and potential source of funding for these ventures. Unlike venture capital, I actually believe that one of the challenges we’re going to have in this area of social-impact investing is that we may end up having way more capital available than we actually do opportunities — good opportunities that fit the model. I think that a lot of individuals out there — whether they’re individuals or whether they’re foundations or charitable-giving entities — social impact opportunities are a huge win-win, because you can invest in things that are aligned with your interests. In our case, we focused on water, energy and youth unemployment (disadvantaged unemployment groups), which are areas that we tend to focus on from a philanthropic point of view.

Related

But it’s an opportunity not to just give, but to invest, and to invest with metrics, with standards and if these entities become successful, you can then recycle the dollars into more entities and more opportunities. I think the dynamics around this can be very different from the proverbial challenge we have in venture capital — which is too many opportunities and not enough dollars. The situation here is: how do we create more opportunities for people who want to give money to social ventures? From our perspective, it was a natural fit because we have (through our foundation) a very large philanthropic component, and it’s an opportunity for us to do things that banks do — provide capital and help these companies grow and develop. It was natural. And we’re hoping that’s what other large organizations are going to see.

Q: You say you see this initiative as self-sustaining, but if it’s not — if you end up with not nearly as much return on investment as you had anticipated — will you put more money into the fund?

What you don’t want to see happen is a whole bunch of dollars go into things where nothing happens or materializes — to some degree that’s a bit of a history of the venture capital industry in this country

A: I would say that’s yet to be determined, but I would like to think the answer would be both — that we will have returns that will enable us to recycle but also as this area continues to grow and evolve, we’ll be able to commit more dollars to it as well. But it’s one step at a time. You have to start somewhere. You know, a lot of these entities are really small, so while $20-million may not sound like a lot of money relative to the size of the bank, in terms of small, emerging, innovative companies, it’s a fairly significant amount of dollars, because a lot of these companies are starting with small financing needs going in. But hopefully they will grow and become larger.

Q: Do you have a goal for the number of companies you would like to finance through this initiative?

A: I think ultimately the more the better. What we’ve done is formed an advisory committee which is going to help us in terms of the selection focus; to not only provide a little independence but also some expertise, because this is a new area for us as well. So, we’re bringing in some expertise to identify where the opportunities are as well.

I will reiterate that success will generate success. What you don’t want to see happen is a whole bunch of dollars go into things where nothing happens or materializes — to some degree that’s a bit of a history of the venture capital industry in this country. We sit here with not enough dollars in venture capital, but part of that is because venture capital returns have been so poor historically that the industry has not been able to attract capital. Capital goes to where success happens. That’s why I think what’s so critical about this area is that we get off to a good start. We don’t want to view these dollars as being charitable dollars that are selected based on a non-economic or non-metric component of the decision. You want to invest in areas that are important but where you’ve got good opportunity for success and good opportunity for return on capital.

Q: Do you think there will ever be a time when the public will view – without cynicism or prejudice — leaders of financial institutions as purveyors of common good?

A: I think that you’ve got a very unusual world today because you’ve got such a visceral view held toward banks in countries like the United Kingdom and Europe and so forth. As I said, it’s very different in Canada. There’s no question that when people look at banks in Canada, we’re held in high esteem — partially because of our relative success — but we’re also held in high esteem because of our community involvement. We give away a lot of money. We support a lot of different initiatives. A lot of it is community based. RBC has 55,000 employees in this country who are actively engaged and involved in their communities, and we support those community efforts. So, when it comes to this area of social impact, I don’t think there’s a better platform to lead from than the banking side, because I think we’re looked at as leaders. As much as I talk about RBC and our success, I give a lot of credit to our competitors as well. I think the banking industry in Canada — all of the major banks — do a very good job in terms of providing leadership when it comes to philanthropy and community activities, sponsorships and so forth. In many ways, given the fact that our primary role is capital formation and providing financing — and we do have this large community-based philanthropic base — we are perfectly situated to be leaders in this area.

Researchers around the world are unlocking mysteries of the brain and causes of mental disorders in a “quiet neuroscience revolution”.

Sponsored by

Sponsored by Chartered Professional Accountants Canada

Management & Strategy Solutions was produced by Postmedia Works on behalf of Chartered Professional Accountants Canada for commercial purposes. Postmedia’s editorial departments had no involvement in the creation of this content.